Market commentary: Stronger Dollar as emerging markets fall on Yuan rout

China’s shock devaluation of its currency last week turned investors’ attention to the frailties in other emerging markets, notably Malaysia and Turkey, which are both facing political crises.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 of its most-traded peers, increased 0.3 percent, climbing for a fourth day. The measure is close to erasing losses spurred by concern that China’s devaluation would undermine inflation and push back the Fed’s liftoff. The euro weakened 0.4 percent to USD1.107/EUR and the Japanese yen fell 0.2 percent to JPY 124.53/USD as of this writing.

The yuan was little changed at 6.3946 after the People’s Bank of China fixed the rate around which the currency can trade at 6.3969, just 0.01 percent from its level on Friday. The freely traded offshore currency was stronger for a third day.

The emerging-market stock index fell as Chinese equities retreated in Hong Kong amid speculation that authorities may dial back support measures implemented to stem a $4 trillion rout in mainland markets. Insurers and banks were the biggest drags on the Hang Seng China Enterprises Index, with just nine out of 40 stocks advancing. The Hang Seng Index dropped 0.6 percent.

The Shanghai Composite Index rose 0.7 percent after jumping 5.9 percent last week. China will probably resume initial public offerings by year-end as the stock-market recovery gives policy makers confidence to pare back emergency support measures, according to analysts in a Bloomberg survey (Bloomberg).

In commodity related news, West Texas Intermediate crude oil weakened to $41.86 a barrel as of this writing, while Brent in London lost 1.35 percent to $48.53 a barrel. The weakness revolves around the news that the Organization of Petroleum Exporting Countries (OPEC) may boost output to a record after Iran’s international sanctions are removed, according to the nation’s OPEC representative.

In fixed income, US rates markets saw yields tick up slightly in the afternoon session last Friday as the US data flow rolled in, although again the price action was reasonably muted. The benchmark 10y yield finished 1.2bps higher at 2.199%, while 2y yields closed up 1.4bps to 0.724%.

This morning in Europe sovereigns tightened, with the 10y bund 3.3bp tighter at 0.65%, and the peripheral countries including Italy and Spain 4.8bps tighter to 1.76% and 1.96% respectively. The Malta 3.3% 2024 government bond is unchanged, yielding 1.52%.

Looking ahead now, with the Eurogroup approval of Greece’s €86bn bailout deal now a formality, focus will likely turn to the Bundestag vote this week where it is expected that, although legislative approval is highly certain, German Chancellor Merkel is likely to run into dissent from fellow lawmakers.

Ahead of this and over the weekend, Merkel has expressed that she is confident that the IMF will join Greece’s third bailout program, signaling in the process that she is ready to discuss debt relief and specifically, ‘leeway on the extension of maturities on interest rates’.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.